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A rushed stimulus misses the mark

  • Writer: Voon Zhen Yi
    Voon Zhen Yi
  • Mar 31, 2020
  • 8 min read

Updated: Apr 3, 2020

Announced as financial relief against the financial ill-effects of COVID-19, the Malaysian government's second stimulus has helped some, neglecting others, and forgetting the big picture



On March 27, 2020, Malaysian Prime Minister Tan Sri Muhyiddin Yassin announced his much anticipated second stimulus package to deal with the effects of COVID-19 on people on the ground and businesses.


After much hype, especially after how the first package came short in addressing the magnitude of COVID-19, the second stimulus provides an additional RM250 billion. While bringing some superficial relief to the masses, the PM's second stimulus has in fact misses its mark.


This is to be expected when plans have been rushed. The Economic Action Council (EAC) only called for proposals on March 22, 2020. I can't recall if a deadline was officially set, but the it is likely that submissions we were still reviewed on March 26, 2020, just a day before. In less than 5 days after calls for proposals made by EAC, the PM went on air slightly after 3pm to announce the second stimulus.


While the urgency and swiftness in introducing this second package was appropriate, as it should any emergency, there simply wasn't sufficient time to adequately assess the suitability and the logic of the proposals made. Several developed countries took several more days to announce their own stimulus properly after reviews and obtaining parliamentary approval (though not all did).


How has the stimulus missed the mark?

First, I'd like to establish that there were some excellent things in the package, such as the timely provisions to MOH for equipment and staff. Cost alleviation mechanism for those whose income have been affected, such as exemptions for lease for the rental of federal facilities and rental in federal housing was is much welcomed (which was also included in proposals jointly made between KSI and ECKL to the EAC - which is basically an idea from Singapore), provision of free internet, and the postponement of income tax returns.


There are some ideas which are okay and may too close to call if they are good or bad, such as the handouts the elderly, orphan children, homeless, and indigenous, as there isn't sufficient information to assess their appropriateness (ie. how are funds distributed? Is it enough?). Things like cash handouts for pensioners is dependent on how big a pension is. If it is a low amount and the pension is old, implying its purchasing power has been reduced by inflation, then getting RM500 would be an appropriate gesture, as well as other factors.


Now the bad.


Inappropriate financial relief


The government announced that they will be giving out:

  • RM1,600 to each household before income of RM4,000.

  • Households earning between RM4,000 – RM8,000 will be given RM1,000.

  • RM800 to single individuals above age of 21 with of RM2,000 and below, while RM500 is given to single individuals above age of 21 earning above RM2,000 up to RM4,000.

  • Civil servants receive a one-off cash assistance of RM500.


We must remember what the goals of such a stimulus should be for in the first place. The logic of how decisions are made into two parts, the socioeconomic welfare dimension, which is the genuine purpose of why this stimulus is introduced, and the political dimension. These two aspects must be considered when making sense of some of these items.


The government has gone about this the wrong way as handouts should not be given en-bloc. Such relief should be specifically targeted at those whose sources of income has been affected. Members of the workforce who continue to draw salaries should absolutely not have been allowed to draw upon this relief. Doing this is essentially giving a bonus at the expense of tax payers.


From a socioeconomic point of view, this made little sense. The reason why handouts are given to groups facing income disruptions is meant not only to ensure they are able to survive, but also to provide them with disposable income which they can recirculate back in the economy. This is to lessen the damage of a negative multiplier effect (an effect where the decrease in spending has negative rippling effects to the economy and affects national GDP. For example, if a person doesn't have money to buy food from a hawker, the hawker will not have enough money to pay their food suppliers, who in turn is not able to pay farmers, and the farmer is unable to pay their workers, etc). It is a necessary injection to keep the economy stimulated.


Hence, from a prudent economic point of view, giving cash hand outs to those earning below RM4,000 or households earning RM8,000 and below, or even those above that salary range - as long as their incomes have been affected, such as being asked to go on unpaid leave or have to be retrenched or essentially unemployed - would be justified. Giving handouts to those still drawing salaries makes no sense.


This is only logical from a political point of view. Individuals drawing below RM4,000 or households earning below RM8,000 are essentially the B40 are the largest voter base. Malaysia also has a huge civil service, employing over a million civil servants, of which are also given handouts despite still drawing salaries. Perhaps politicians are trying to please the masses and taking the opportunity to earn some political points? This is extremely dangerous should this be the case as this isn't the time for gimmicks as the economy is on the line.


Missing the paymasters - businesses. Risking long-term effects.


Businesses are most vulnerable during the MCO as most have been deprived of their sources of income. Yet, this is the group that has been missed in the stimulus and are pushed to the brink of bankruptcy (you might be thinking about the RM100 billion for SMEs, we'll get to that).


While there have been some small gestures like moratoriums, these are merely postponement on loans, which still need to be paid back and interest will continue to compound. Electricity discounts are a welcome, but if offices are empty and production is at zero, then bills will likely be low anyway. The positives are in the agrofood grants, presumably to increase food production meant as a contingency. Exemption on HRDF levies for all sector for 6 months is also good. There is also the Employment Retention Programme under SOSCO which provides financial assistance of RM600 to workers earning below RM4,000 who agree to go on unpaid leave beginning March 1, 2020. They can only apply for this relief after a full month, for up to 6 months, which is also a good initiative (only eligible for those paying their Employment Insurance System (EIS)).


It is the other initiatives where the government completely missed the mark.


One would normally welcome a wage subsidy programme, also by SOSCO, which involves the government paying RM600 per employee per month for up to 3 months with the condition that none of these employees undergo pay cuts nor is the company allowed to layoff the employee (again this only applies to workers paid a salary of RM4,000 and below). This option for those wanting to enroll into the programme only applies to businesses facing a decrease of income of up to 50% since January 1, 2020 is eligible for the programme. This is odd. While the tourism sector and related industries has been affected by the lack of Chinese tourism since late 2019, there are other industries that also been affected and desperately require any form of financial assistance they can get. Instead, businesses badly affected by the movement control order (MCO) which came into effect since March 18, 2020 have not been allowed to tap into this this relief. RM600 per worker might be a small sum for smaller businesses but is significant for big organisations as the maximum claimable is for 100 employees per company, adds up to RM60,000.


Failure to realise that businesses need such forms of financial relief is indicative of the disconnect between the needs of SMEs and those who concocted the stimulus.


Further evidence of this can be seen in the biggest share of the stimulus worth RM100 billion is allocated to SMEs and small businesses. This would've been a move in the right direction, except that few, if not no one, seem to know where to apply these funds or if these funds are in fact grants or loans in the first place. I've spent a good hour on the websites from the Treasury, Income Revenue Board, SOSCO, and SME Corp and couldn't find any application forms relating to the RM100 billion to SMEs. We can only imagine how much more other SMEs will struggle looking for this information, particularly micro SMEs, who may not be as savvy with technology or have poor internet connectivity.


There hasn't been sufficient communication on how these funds to businesses can be accessed. These websites should have a direct link for SMEs to make their applications instead of forcing them on a treasure hunt.


By the way, some of these servers, especially the Inland Revenue Board, could really use a bandwidth upgrade. To help people urgently needing this relief, their site needs to be working effectively (yes, I know many people are logging onto the site at the same time which is why the site is slow, but let's improve it for everyone's sake).

IRB needs new servers..

Banks are offering SME loans (example), likely dispersed through the stimulus or from their own reserves. This has been the most visible forms of business "relief". However, these loans also need to be paid back with interest (which is fair, I guess). And again, there doesn't seem to be genuine effort to help the SMEs.


This is made worse by announcement by the Ministry of Human Resources mandating that employees of non-essential businesses continue to be paid. This makes little sense as non-essential businesses are the ones deprived of avenues of earning during the MCO. On the other hand, essential services are able remain open, make their buck and also allowed to make cost reductions despite them being the least affected. I'm not saying that essential services should not be allowed to make changes to personnel, as any business should be allowed to manage their cost and HR needs as they would do normally, as long as workers are not being exploited. But forcing non-essential business to pay normal salaries under these circumstances is delusional.


Perhaps this has been been wrongly conveyed by the Ministry and what they meant was that employers cannot cut salaries (which are under contract) unless they have an agreement with employees to a salary reduction (essentially forming a mutually agreed, new contract). Employees can legally object to this and there is nothing the company can do if that is the case (except to offer retrenchment package and close shop). This is regular practice, long before the pandemic. Perhaps this is where the confusion is and something the HR Ministry must clarify.

If it is truly the case that businesses are forced to pay normal salaries under times of affected cash flows, this will surely cause many businesses to go bankrupt. Failed businesses leads to higher levels of unemployment, employees get zero pay (in contrast to reduced pay), and lead potential social problems which could be more expensive to fix. Again, this only makes sense from a political dimension, as politicians are willing to tick off business owners to please the vast number of employees. Ultimately, employees will be disappointed when their employers are forced to close shop. So officials need to think this through.


Missing the mark with the timing of the wage subsidy programme, forcing employers to pay full salaries, and not providing genuine relief for SMEs is senseless from a business point of view. Again, the making sense of this needs to viewed from a political dimension. There were some interesting conspiracy theories by Ali Syed Akbar in his blog post. The post has since been removed. To avoid this POST facing the same fate, I will refrain from elaborating further here.


Conclusion


The second stimulus will not be able to do its intended job in keeping businesses alive past the MCO. Some initiatives have been poorly targeted, contributing unnecessarily to national debt while making little to no impact. Some initiatives were appropriate in providing relief to some who genuinely need it, while giving other an extra they do not need at the tax payers expense. Due to the lack of effectiveness to sustain businesses, the government will likely launch a 3rd stimulus because they country simply cannot allow businesses to go bust.


Recommendations


  1. Review cash handouts to those still drawing salaries. This is a matter of reducing the deficit.

  2. Be proactive in helping businesses. Keep as many alive for a time when the MCO is lifted and economic activity can resume as per usual.

  3. The EAC should consult the businesses community directly and understand the issue from their point of view. This will enable more effective proposals.

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